The Basics of the stock market

Ever heard of the stock market and imagine what it entails; products being sold in the market and how to be part of it?

What are stocks? Stocks which are also called shares or equity represent units of ownership of a company or business. That is, if Wayne and John contribute $50,000 each to start a business, the $50,000 contributed by John into the business represents shares of the business he owns. In essence, the $50,000 contributed was in exchange for 50% of the ownership of the business. When you buy a company’s shares, you are buying a particular percentage of the ownership of the company. 

Buying a company’s shares gives you three privileges, which includes; taking part in the sharing of profit (in form of dividends) made by the company, voting right as regards decisions to be made by the company and right to transfer your own shares of the company to another investor in exchange for money.

It is, however, germane to state that as a shareholder you have no right of ownership of the physical assets of the company, as the company is a different entity, which is different from the owners(shareholders). In essence, a shareholder has no power nor right to sell or claim ownership of the company’s assets. Their right is limited to the share they own and it’s privileges.

Market: As you might know, the market is a point where a buyer and seller interact to execute a trade. In the case of stocks, the stock exchange market is a market mainly for the buying and selling of stocks and other financial securities.

Public Companies: In the financial market, public companies are companies whose shares are open to the general public for investing, such companies end with “PLC’’. Companies whose shares aren’t open for public investing are called private companies and have their names end with LTD. When you invest in the stock market you are investing in a public company, also called quoted company, quoted, because it can be found on the stock exchange market for purchase.

IPO(Initial Public Offering): When a private company, decides to sell its shares to the public for the very first time, this is done through IPO, this process translates the company from a private company to a public company.

Primary Market: Investors who purchase shares during IPO bought them in the primary market, as it is bought directly from the company. The proceeds from the primary market go to the company.

Secondary Market: In this market, investors who already own shares of companies sell their shares to other investors in exchange for money, the proceeds from the secondary market go to the investors and not the company. In essence, if there is no shareholder willing to sell their shares, the company’s shares won’t be available for purchase by other investors.

Bid price: the stock is measured by units and each unit has a price tag. For example, WFC shares can trade for $4 per share. The bid price is the amount investors are willing to buy each unit of shares on the other hand Ask price is the price shareholders are willing to sell each unit of their shares. For you to successfully buy a company’s shares in the stock market, the stockbroker would need to match your order with a shareholder who is willing to sell at the price you are demanding to buy.

Brokerage Account: just as you need a savings account to save money, a brokerage account is needed to buy and sell stocks. To get started, open a brokerage account.

Be on the lookout for our subsequent posts on the stock market; how to determine what stock to buy and ways returns are made in stock investing.